Musings

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Bitcoin Is Failing As Money—But Bitcoin Cash Isn’t

Money has three principal functions: as a medium of exchange, as a store of value, and as a unit of account.

Secondary attributes that have aided the adoption of various forms of money include interestingness (“Ooh! Look how shiny that gold is!”), uniform divisibility, portability, resistance to counterfeit, and imposeability. That last one is important, because it is what makes state-backed fiat currency the dominant form of money in the world. The U.S. government is territorially and militarily powerful. That allows it to print green paper unbacked by any commodity and tell people both within and without its jurisdiction to accept it. For almost fifty years, that model of money has prevailed.

Bitcoin, in the last few weeks, has made me want to add another attribute to this list: low transaction costs. Miners on the Bitcoin network—which once made a feature out of its low transaction costs—now charge roughly the equivalent of $43 to upwards of a hundred dollars to add a single transaction to the Blockchain. The size of a block on the Bitcoin Blockchain is limited. Currently, it is 1MB. A user-defined transaction fee is broadcast with every Bitcoin transation, and miners add transactions to new blocks in exchange for these fees. Bitcoin mines new blocks every 10 minutes.

I first became broadly aware of Bitcoin in 2011. Back then, the price was $10 a coin, and back then the standard cost of adding a transaction to the blockchain was .0001 BTC, or a tenth of a cent. Whoop! Nowadays, Bitcoin sells for upwards of $14,000 a coin, putting the equivalent price of .0001 BTC up to $1.40. But fees have increased much more than this, because there is more congestion. More users than ever—drawn in by rising Bitcoin prices—are trying to use the network at once, and this is creating congestion. If more than 1MB of transactions are broadcast, then miners will only add the most expensive transactions. The cost of the transaction fees has been bid up and up and up to the point where yesterday it averaged $43 per transaction. That might not be so bad if you’re sending 10 BTC to pay for a Lamborghini, but if you’re not a Bitcoin millionaire and you want to buy a coffee or pizza, or want to send $20 to a friend, or even just want to buy into Bitcoin for a couple of hundred bucks, a $43 transaction fee is a real killer. It makes any use of Bitcoin as a medium of exchange impossible for anything much other than London or Hong Kong real estate, and Lamborghinis, etc. This congestion also means days and days of waiting for transactions to be added to the blockchain.

Ultimately, this problem is preventing Bitcoin from functioning as a medium of exchange.

The problem has gotten so bad that millions of dollars are trapped in small accounts where the network transaction fees are larger than the balance of the account, effectively rendering them worthless. So for a lot of users, Bitcoin has turned out to be a pretty shitty store of value.

Now, a problem is not a problem if you solve it. An obvious solution is to increase the block size, to ease congestion. But the community has failed to implement this.  But there has been a failure to find a solution to this problem of massive transaction fees, which is why they are still very high. Bitcoin’s community—which is controlled by the miners—has totally failed to reach a consensus on how to increase the block size, or indeed whether to increase the block size at all.

Some users allege that larger blocks will result in more centralization, as it will increase storage demands. Developers in the community such as Blockstream instead propose a Lightning Network to solve the problem of congestion. This Lightning Network is a space in the blockchain where multiple Bitcoin users create a contract to store their Bitcoin, and can transact in it among themselves without any fees for accessing the blockchain. But this is a theoretical future solution to a current and practical problem, so it’s not really offering any relief. If it was, we wouldn’t be having this conversation. Plus, even in the Lightning Network vision, users would still have to access the blockchain in order to put their funds into a Lightning Network channel, which would still require them to pay the fees to do so. Furthermore, Lightning Networks themselves might also demand high fees.

Anyway, the idea that larger blocks will cause centralization is extremely dubious. Data storage is very cheap, and getting much, much cheaper. Data transfer rates across the internet are also improving. And even the developers of the Lightning Network admit that in order to serve a global population, block size increases up above 100MB—far above even what Bitcoin Cash has today—will become necessary.

Massive fees, of course, benefit one specific group: miners. So, of course, it’s in their interest to keep the fees high, and to avoid increasing the block size. But by doing so, they are strangling the entire network.

Relief is coming in the form of hard forks. Some Bitcoin users have forked off Bitcoin’s history and started their own versions of the coin, Bitcoin Cash and Bitcoin Gold. These new implementations of Bitcoin are based around the principle of increasing the block size periodically to avoid congestion. Already, these coins already have much lower transaction fees—around 1-2c per transaction. As a result, they’re beginning to capture the market. Bitcoin Cash in particular has increased in price 37% over the past week, while Bitcoin Core’s price has fallen 25%. Other users are migrating away from Bitcoin Core toward other cryptocurrencies such as Ethereum, Monero, Zcash, Digibyte, Dogecoin, and Litecoin, as well as next-gen unmineable coins like IOTA and Rai Blocks. But as more and more users are drawn into the cryptocurrency space by rising crypto prices, other cryptocurrencies based on the basic Bitcoin model of small block size are also experiencing rising transaction fees. Monero and Ethereum in particular have seen their fees greatly spike.

Are transaction fees the thing that kills cryptocurrency? Almost certainly not. Decentralized ecash is a very popular concept that has attracted billions of dollars of investment. Meanwhile, central banking and state-backed fiat money have become increasingly unpopular in the wake of the 2008 financial sector bailouts that funnelled trillions of dollars away from taxpayers and into the pockets of bankers. And there are already many viable alternatives to Bitcoin Core, such as Bitcoin Cash which can function as a medium of exchange, and store of value.

But maybe this will be the thing that kills Bitcoin Core. And given that Bitcoin Core is by far the biggest and most widely known cryptocurrency, that may cause a severe but temporary depression for the wider crypto market that scares away many retail and institutional investors. Time is running out for a solution that drops transaction fees to a manageable level, and allows Bitcoin Core to function again as a medium of exchange and store of value. Bitcoin’s rate of adoption as a medium of exchange is already abysmal, with only 3 out of the top 500 ecommerce websites accepting it as payment for goods and services.

While transaction fees are currently enriching the miners, this rent-seeking is in danger of killing the golden goose. Bitcoin Core’s backers do not have the power of the U.S. government. They can’t force people to use Bitcoin Core to, for example, pay taxes. It’s a voluntary model. So if people can’t use Bitcoin Core as it was originally envisioned—as ecash—then the only people using it will be people HODLing it simply because the price has gone up. That is completely unsustainable. It’s the definition of a bubble, and at least in the tulip bubble the tulip growers didn’t charge their clients huge fees to move their tulips around! As more and more Bitcoin Core users switch to Bitcoin Cash and other alternatives, this bubble will burst.

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Automation, Space Colonization & The Post-Transactional Economy

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Image: NASA

“How is this even a business?” my late father asked when I described a notional model for human space colonization. “How are you going to make money? What product are you going to sell?”

Admittedly the model — developing a swarm of self-replicating , self-repairing decentralized, solar-powered construction automata and using them to mine asteroids and produce more such automata as well as habitable colonies— is not monetizable in the same fashion that building a picture-sharing smartphone app, or social network, or web search engine is.

And although there are ways to monetize space colonization — it is, essentially, a very extreme kind of full-stack real estate development — I think my father hit upon the fact that this kind of venture is of a fundamentally different nature to the modern economy as it exists on Earth today.

And the more I think about this kind of economic development, the more fascinating I find it.

I would never have started thinking about this process if it wasn’t for the Moore’s Law-style cheapening of solar energy and the accelerating development of robotics and AI. We are heading toward a world where plentiful solar energy is very cheap to capture, cheap to store thanks to breakthrough in batteries, and where advanced computing and robotics technologies give us very many options in terms of what to do with that energy.

I believe that aside from ending global poverty and hunger (which are already falling at very rapid rates) and powering complex virtual reality simulations, space exploration and colonization will form a very major aspect of what we do with our newfound energy inheritance.

Why? Well, consider that enough energy from the Sun hits the Earth in an hour than we use in a year. Then consider that only 0.000000045292 percent of the Sun’s energy hits the Earth. There’s a whole lot of energy up there, radiating out into space. Energy we could do useful things with. And that’s just one star.

Then consider the fact that natural resources on Earth such as water, hydrocarbons and metals exist in very finite quantities. There are vastly more of all of these things up in space.

Finally, consider the dangers of not colonizing space. A one-planet species is a very endangered species. One global cataclysm — like a nuclear war, or asteroid strike, or pandemic bug — could wipe us out. Colonizing space would remediate this problem.

So, what is going to change?

At the most basic level, economics all boils down to physics. As humans our behaviour is circumscribed by physical limitations, and physical needs and wants.

We use markets and monetary systems as means to efficiently satisfy needs and wants given the finite resources that are currently accessible. Markets work by matching willing buyers and willing sellers, simultaneously allowing the buyers to get the most they can given the sellers’ needs, and allowing the sellers to get the most they can given the buyer’s needs.

We bring new resources into the orbit of the economy via human labour, which is a finite resource subject to feeding, clothing, housing, transporting, educating. Human labour is subject to tiredness, and emotions, and competing desires, and quitting the job and finding another better paying or less tiring one, and all kinds of things. Satisfying these needs requires the development of a highly fungible medium of exchange, such as money to coordinate all of these complexities.

Replacing human labour with automated labour removes many of these complexities and replaces them with a simpler framework altogether: the cost of energy. The more automated a system becomes, the less important the flow of a fungible medium of exchange becomes. Access to sustainable and replenishable sources of energy — to run the robots, drones, AI and other such automata — becomes the key determinant factor. This is a whole new post-transactional economy.

Obviously money will remain an essential factor for coordination in inter-human economic relations. But for highly-automated ventures — particularly those operating in space, where there is currently no such thing as the rule of law, no easy access to subcontractors, and plentiful natural resources in asteroids, moons, planets, and solar energy, and so forth — it is more of a case of capturing resources and deploying them as needed, at least at the frontier where there is no clear system of property ownership beyond the law of the jungle. And space — unlike Earth — is a huge and endless frontier.

This kind of development, of course, is only really possible given very high levels of technology and massive economies of scale and given massive pre-existing resources. You need to have control of a swarm of highly-developed robots in the first place to be able to get to the stage where they can become self-replenishing and self-perpetuating (so long as they can gain access to energy). And you need highly efficient energy capturing technologies (like nuclear fusion or high-efficiency photovoltaic cells) to keep your EROEI ratio positive.

But once you have these things (all of which are gradually coming to fruition) it becomes plausible to ride the swarm all the way up until you have constructed a Dyson sphere around the Sun. And once you have a single Dyson sphere capturing the entirety of the Sun’s energy output, sending new swarms out to other stars to repeat the process seems just a matter of hitting the repeat button.

Of course, I expect arms races will reduce the efficiency of any such process. The potential gains from expansion into space in terms of power and reach and resources are so massive that many different actors will want to get a piece of the action, and grab what they can get. I would be surprised if many of the huge gains in resources we get from colonizing space aren’t wasted on endless warfare between different groups and ideologies.

But that has been a major pattern throughout human history. And we have made it a long way already.

 

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Is Jeremy Corbyn The Answer?

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Labour’s defeat in the 2015 election may have been as much of a function of demographics as anything much else. As I wrote earlier this week: “Britain is greying, and older people tend to be more conservative.”

If that’s the case, then the deck will be stacked against Labour in 2020, and even more so after constituency boundary changes that will help the Tories and hurt Labour.

Still, the question that Labour members and supporters should be asking themselves is: which one of the candidates can beat the Tories in 2020?

As a political movement, only in power can you wield power. In opposition, you — and your supporters — are the earth in front of the steamroller of power.

That’s not necessarily a call to reject Jeremy Corbyn, though. There are legitimate reasons to think that he might be the best choice on these terms.

My doubts about Corbyn begin with his portrayal as overly leftish. If Ed Miliband was perceived as too left wing for the British electorate in 2015, why would Corbyn — who is a good few swathes of territory to the left of Miliband — be right for an even greyer and more conservative Britain in 2020?

A second factor is that Corbyn is already on the defensive over alleged associations with anti-Semitic figures. I’m not in any way suggesting Corbyn is an anti-Semite — or wilfully associated with anti-Semites — but the tone of the conversation makes it look like a troubling factor in winning a general election against a hostile Tory press.

Furthermore, his conciliatory language toward such groups as Hezbollah, Hamas, Maduro’s Venezuela and Vladimir Putin’s Russia offers even more ammunition for the Tory press to use against him to portray as a dangerous choice for prime minister, just as they did to Ed Miliband. And that is the case even if his words were meant to open dialogue rather than endorse a particular set of views or policies.

And further, it would seem to split the Labour parliamentary bloc. The Tory press will ask the question: how can we expect him to lead the country when he can’t even lead his own party?

Still, it is hard to ignore what Corbyn has stirred up in the leadership battle. It looks increasingly like what the SNP has managed to stir up in Scotland. Hundreds of thousands flocking to register as supporters. A genuinely optimistic alternative vision of the future. As George Monbiot writes in The Guardian: “Labour’s inability to provide a loud and proud alternative to Conservative policies explains why so much of its base switched to Ukip at the last election. Corbyn’s political clarity explains why the same people are flocking back to him.”

Monbiot quotes openDemocracy‘s Ian Sinclair comparing Corbyn to Margaret Thatcher, noting she was: “Divisive, hated by the press, seen by her own party as an extremist… [and] widely dismissed as unelectable. The Tory establishment, convinced that the party could win only from the centre, did everything it could to stop her.”

Corbyn is a conviction politician like Thatcher, with a vision of radical change. Corbyn’s leadership election opponents aren’t. They tend to advocate chasing after the electorate. That is not necessarily a stupid thing to do. It worked to get Blair and Cameron elected. But times change. Chasing after the electorate — and reinforcing Tory myths about the necessity of slashing the deficit, reducing immigration and reducing public spending — didn’t work in 2015 for Labour. It just helped the Tories portray Labour as incompetent on their own terms. Corbyn won’t re-inforce deficitphobe myths. He is a principled anti-austerian in a field that otherwise concedes the narrative almost entirely to the Tories. And his economic views have a good deal of credibility and support from economists.

In the end, I chose not to back Corbyn as Labour leader. It just looks to me like too much of an uphill struggle to win in 2020 — or earlier should Cameron’s majority of twelve fall — from Corbyn’s position. But I might be wrong. And I will be happy to see him elected Labour leader and given a chance to change the narrative.

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Rich people prefer productive companies while the poor prefer shiny lumps of metal.

Gallup’s poll on Americans’ favorite investments always makes fascinating reading.

Every year, Gallup asks Americans to choose the best investment from the following choices: Real estate, stocks and mutual funds, gold, savings accounts and certificates of deposit, or bonds.In the years since the 2008 financial crisis and housing bust — after which Americans as a group briefly ranked gold as their favorite investment — real estate has once again swung back into favor:

[Gallup]

But as Barry Ritholtz notes over at Bloomberg View, the most interesting thing is that there are some serious differences between the investment styles of the poor and the rich.

Read More At TheWeek.com

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Is there life on Jupiter’s moon?

The hunt for alien life just made a pretty big breakthrough.

Unfortunately — or perhaps fortunately — we’re not anticipating flying saucers on the White House lawn anytime soon. Instead, scientists discovered a (relatively) easily-accessible source of hydrogen and oxygen — which together make water, one of the most basic ingredients for life — on one of Jupiter’s moons.

There is already lots and lots of evidence for the existence of both liquid and frozen water in other parts of our solar system. Frozen water is abundant in asteroids. In 2009, huge amounts of frozen water were found on Earth’s moon. Some scientists suggest that Mars’ surface has been shaped by the flow of liquid water, and NASA’s Curiosity rover found frozen water in soil samples on Mars just this year. And back in 2000, the Galileo probe found evidence of water on Jupiter’s moons Ganymede and Europa — and scientists believe that liquid oceans of water are trapped beneath the the moons’ frozen surfaces.

Read More At TheWeek.com

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Would you cuddle a stranger for $80 an hour?

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Cuddling feels great. But cuddling also has lots of quantifiable medical benefits. It releases the trust hormone oxytocin, which creates a sense of well-being and happiness, and endorphins, which are a natural painkiller. It also relieves stress, reduces inflammation, lowers blood pressure, and may prevent depression.

A way to create and maintain social bonds within families, most cuddling takes place between sexual partners, or between children and parents. But a new slew of businesses have appeared offering cuddling as a paid-for service. And the prices can be steep.

Read More At The Week.com

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The London Real Estate Bubble

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In October, London real estate asking prices jumped 10%. In my view is kind of parabolic-looking jump has developed out of quite a silly situation, and one I think is a good exhibit of just how irrational and weird markets can sometimes be.  London real estate prices have been rising strongly for a long while, and a large quantity — over half for houses above £1 million — of the demand for London real estate is coming from overseas buyers most of whom are buying for investment purposes. It is comprehensible that London is a desirable place to live, and that demand for housing in London might be higher than elsewhere in the UK. It is a diverse and rich place culturally and socially, boasting a huge variety of shopping, parks, art galleries, creative communities, restaurants, monuments and landmarks, theatres and venues, financial service providers, lawyers, think tanks, technology startups, universities, scientific institutions, sports clubs and infrastructure. Britain’s legal framework and its straightforward tax structure for wealthy foreign residents has proven highly attractive to the global super rich. With London real estate proving perennially popular, and with the global low-interest rate environment that has made borrowing for speculation cheap and easy, it is highly unsurprising that prices and rents have pushed upward and upward as the global super rich — alongside pension funds and hedge funds — sitting on large piles of cash have sought to achieve higher yields than cash or bonds by speculating in real estate. In some senses, London real estate (and real estate in other globally-desirable cities) has become a new reserve currency. And while this has occurred, price rises have proven increasingly cyclical as both London residents and speculators have sought to buy. The higher prices go, the more London residents become desperate to get their feet on the property ladder in fear they won’t ever be able to do so, and the more speculators are drawn in, seeing London real estate as an asset that just keeps going up and up.

Yet the bigger the bubble, the bigger the bust. And I think what we are seeing in London is a large psychological bubble, a mass delusion built on other delusions. Chief among these delusions is that real estate should be seen as a productive investment, as an implicit pension fund, or as a guaranteed source of real yield. While investors can look at real estate however they like, there is no getting away from the fact that real estate is a deteriorating asset. Sitting on a deteriorating asset and hoping for a real price gain — or even to preserve your purchasing power — is a speculation, not a productive investment. For commercial enterprises buying as a premises for business, or for residents buying as a place to live this is not in itself problematic. But as an investment this can be hugely problematic. It is just gambling on a deteriorating asset under the guise of buying a “safe” asset.

Of course, in the UK where housing has been treated by many successive governments as an investment, and as a haven for savings and pensions, real estate owners have done particularly well. Governments have been willing to prop up the market with liquidity via schemes like Help To Buy and via restrictive planning laws to rig the market to restrict supply. This may make investors feel particularly secure, but governments can be forced — not least by demographics — to swing in another direction. An important side-effect of continually rising prices and a restricted supply of housing is that many people will not be able to afford to buy a home. With the house prices-to-wages ratio sitting far above the long-term average, the next UK government will come under severe pressure within the next few years to allow — and probably subsidise — much more housebuilding to bring down housing costs for the population. The past-trend of government-protected gains may have inspired a false sense of security in investors.

But such a reversal of policy would not in itself crash the London real estate market. After all, London is a unique place in Britain, and the majority of the new housebuilding may take place away from London. More likely, the bubble will simply collapse under the weight of its own growth. Sooner or later, even with liquidity cheap and plentiful, the number of speculators seeking to cash out will exceed the number of speculators seeking to cash in, and confidence will dip. Sometimes, this simply equates to a small correction in the context of a large upward trend, but sometimes — especially when it can be negatively rationalised — it manifests into a deeper malaise.

When this occurs, one probable rationalisation is as follows.  Domestically, many of the relatively low-income artists, designers, technologists, musicians, students, artisans, academics, service workers and professionals (etc) who make London London are priced out, then they will go and contribute to communities elsewhere where rents and housing costs are lower — Birmingham, Manchester, Glasgow, Paris, Berlin, out into the sprawl of the home counties, and deeper into the English countryside, to places where a four bedroom house costs the same as a studio apartment in central London. Where once this would have been culturally, professionally and socially prohibitive, fast, ubiquitous internet allows for people to live a culturally and socially connected life without necessarily living in a big city like London. Internationally, other cheaper cities and jurisdictions will simply catch up with London in terms of amenities and desirability to the global super class. Competition for global capital  is huge, and while London as an Old World metropolis has done well since 2008, it may suffer in the wake of renewed competition from newer, cheaper, faster-growing Eastern metropolises.

When the bubble begins to burst — something that I think could occur endogenously within the next five years, especially if the fast increases continue — speculators, and especially speculators who are heavily leveraged may face severe problems, resulting in a worsened liquidation and contraction, and possibly threatening the liquidity of heavily-invested lenders. As many people at the table are sitting on big gains, they may prove desperate to cash out. Just as many presently feel pressured to get in to avoid being priced out of London forever, a downward turn could be severely worsened as many who are heavily invested in the bubble and scared of losing gains on which they hoped to fund retirements (etc) feel pressured to get out. Such an accelerated liquidation could easily lead to another recession. While I doubt that London prices will fall below the UK average, prices may see a very sharp correction. The psychological bubble is composed of multiple fallacies — that housing is a safe place to put savings and not a speculation, that deteriorating real estate should yield higher returns than productive business investments, that the UK government will continue to protect real estate speculators, that large flows of capital from overseas speculators will continue into London. A bursting of any of these fallacies could begin to bring the whole thing into question, even in the context of continued provision of liquidity from the Bank of England.

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What America Really Thinks About Obamacare

When I see discussion of Obamacare in the media and especially on blogs, I often see the impression that Obamcare is a communist scheme to impose socialised medicine in the United States:

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Actually, Obamacare was first dreamt up by the conservative Heritage Foundation, and first implemented at the state level by the Republican former Massachusetts governor Mitt Romney. (And for what it’s worth, I wrongly judged Republican opposition to Obamacare as an immovable obstacle in Romney’s quest to become the Republican Presidential nominee, but I guess Republicans were far more fickle than I thought). So as its origin implies, Obamacare is not exactly a communist, or social democratic idea. A charge of socialism or communism might be more fairly levelled against Obamacare if Obamacare were a law to confiscate all hospitals, drug companies, biotechnology companies and insurance companies from private hands. But it does no such thing. The opposite, in fact. More principled critics of Obamcare might more accurately describe it as corporatist — guaranteeing revenue streams for the insurance industry through the individual mandate — but that has not exactly been the Republican Party’s line of attack.

Given that opposition by the Republican-controled House to Obamacare is the most significant cause of the current government shutdown, it is worthwhile looking over how Americans actually feel about the law, not least to gauge the extent to which Americans may or may not support the Republicans now that their opposition to Obamacare is having real consequences.

It has long been said that Obamacare is unpopular, and the polls bear this out. A September CNN/ORC poll showed that Obamacare was supported by 43% of respondents, and opposed by 51% of respondents. But here’s the catch: 16% of respondents opposed Obamacare for not being liberal enough. Presumably, they would prefer a single payer system, as is the reality throughout most of Europe an Canada. (Of course, a move to such a system might be more fairly described as socialist, but that is another argument for another day). A sizeable number want something more liberal than Obamacare, and so would presumably prefer Obamacare to the status quo, even if they still claim to oppose it. So the consensus is actually against the Republican position by 59% to 35%. And that is why opposing Obamacare in this fight-to-the-death manner will be received negatively by a majority of Americans. Only 35% of Americans are against Obamacare because it is too liberal, and even then a substantial number of those — such as seniors who receive government benefits, or poor rural Republicans receiving food stamps — may be against shutting down the government to fight Obamacare. The Republicans are fighting a losing fight, and as the shutdown grinds on may be doing irreparable damage to their 2014 election prospects.

More generally, I find it rather puzzling that Republicans — convinced Obamacare will fail disastrously — are going to such lengths to oppose it. Like Prohibition once was, it is now law, and if it is destined to precipitate disaster — by increasing unemployment, by increasing healthcare costs, by increasing strain on the healthcare system, or by any other means — then it will be quickly rejected and repealed in the future.

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In The Long Run We’re All Dead

Niall Ferguson’s bizarre attack on John Maynard Keynes which he has now apologised for — claiming that Keynes’ lack of children led to him taking an irresponsible attitude to the long run — has prompted many apt responses regarding the fact that Keynes and his wife tried multiple times to have children, and that Keynes wrote many works that showed an acute thoughtfulness regarding the long run in essays such as Economic Possibilities For Our Grandchildren. 

But as soon as I heard Ferguson’s remarks, I re-read Keynes’ famous quote in full:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Keynes is actually saying the opposite of what Ferguson implied he was saying. Keynes is saying that economists who say that in the long run unemployment will fall and markets will move back toward equilibrium are making themselves useless. That unemployment will sooner-or-later fall is almost inevitable — eventually storms end, and rough seas become calm again.

But when unemployment has been high for years, and when the unemployed become so discouraged that they drop out of the labour force in vast numbers it is useless to merely quip that sooner or later markets will restore equilibrium. Having soaring unemployment, discouraged workers, rusting skills, dilapidated infrastructure, weak growth and idle capital now and potentially for years to come is a grossly and grotesquely irresponsible position. The effects of mass unemployment are damaging and lingering to families:

The stress of unemployment can lead to declines in individual and family well-being (Belle & Bullock, 2011). The burden of unemployment can also affect outcomes for children. The stress and depressive symptoms associated with job loss can negatively affect parenting practices such as increasing punitive and arbitrary punishment (McLoyd, 1998). As a result, children report more distress and depressive symptoms. Depression in children and adolescents is linked to multiple negative outcomes, including academic problems, substance abuse, high-risk sexual behavior, physical health problems, impaired social relationships and increased risk of suicide (Birmaher et al., 1996; Chen & Paterson, 2006; Le, Munoz, Ippen, & Stoddard, 2003; Verona & Javdani, 2011; Stolberg, Clark, & Bongar, 2002).

And damaging to wider communities:

Widespread unemployment in neighborhoods reduces resources, which may result in inadequate and low-quality housing, underfunded schools, restricted access to services and public transportation, and limited opportunities for employment, making it more difficult for people to return to work (Brisson, Roll, & East, 2009). Unemployed persons also report less neighborhood belonging than their employed counterparts, a finding with implications for neighborhood safety and community well-being (Steward et al., 2009).

Keynes’ point in the quote Ferguson was discussing was that economists should seek ways and means to minimise such damaging long-term effects. So whether or not we agree with Keynes’ philosophical and political conclusions, it is absolutely misleading to claim that “in the long run we’re all dead” was a call for hedonism or economic irresponsibility.

Any serious criticism of Keynes’ thought requires that critics have actually read and understood Keynes and not just absorbed second-hand caricatures of his ideas.

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Why the Gold Crash? The Failure of Inflation to Take Off

One of the key features of the post-2008 gold boom was the notion that inflation was soon about to take off due to Bernanke’s money printing.

But so far — by the most-complete inflation measure, MIT’s Billion Prices Project — it hasn’t:

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To me, this signifies that the deflationary forces in the economy have so far far outweighed the inflationary ones (specifically, tripling the monetary base), to such an extent that the Fed is struggling to even meet its 2% inflation target, much less trigger the kind of Weimar or Zimbabwe-style hyperinflation that some gold enthusiasts have projected.

The failure of inflation to take off (and thus lower real interest rates) is probably the greatest reason why gold’s price stagnated from 2011 and why gold has gone into liquidation the last week. With inflation low, investors became more cautious about holding gold. With the price stagnant, the huge gains that characterised gold’s rise from 1999 dried up, leaving more and more long-term investors and particularly institutional investors leaving the gold game to hunt elsewhere for yield.

I myself am an inflation agnostic, with deflationista tendencies. While I tend to lean toward the notion of deeply-depressed Japan-style price levels during a deleveraging trap, price levels are also a nonlinear phenomenon and could both accelerate or decelerate based on irrational psychological factors as much as the level of the money supply, or the total debt level, or the level of deleveraging. And high inflation could certainly take off as a result of an exogenous shock like a war, or series of natural disasters. But certainly, betting the farm on a trade tied to very high inflation expectations when the underlying trend is largely deflationary was a very bad idea, and those who did like John Paulson are being punished pretty brutally.

The extent to which this may continue is uncertain. Gold today fell beneath its 200-week moving average for the first time since 2001. How investors, and particularly institutional investors react to this is uncertain, but I tend to expect the pendulum to swing very far toward liquidation. After all, in 2011 most Americans named gold the safest investment, and now that psychological bubble is bursting. That means that for every goldbug buying the dip, many more may panic and sell their gold. This could easily turn to a rout, and gold may fall as low as the cost of production ($900), or even lower (especially considering gold’s high stock-to-flow ratio). Gold is a speculation in that it produces no return other than price rises. The last time gold got stuck in a rut, it was stuck there for almost 20 years.

However, my case for physical gold as a small part of a diverse portfolio to act as a hedge against systemic and counterparty risks (default cascades, Corzine-style vaporisation, etc) still stands, and lower prices are only good news in that regard. The financial system retains very many of its pre-2008 fragilities as the deregulated megabanks acting on margin continue to speculate in ways that systematise risk through balance sheet interconnectivity. Another financial crisis may initially lower the price of gold on margin calls, but in the long run may result in renewed inflows into gold and a price trend reversal. Gold is very much a barometer of distrust in the financial, governmental and corporate establishment, and as middle class incomes continue to stagnate and income inequality continues to soar there remain grave questions over these establishments’ abilities to foster systemic prosperity.